Gershwin Company is an all-equity firm that has projected sales of $100 million next year. Sales are expected to grow at 14 percent for the following two years and then level off at 5 percent thereafter. Costs and depreciation are 40 and 20 percent of sales, respectively. Net working capital and capital spending requirements are expected to be 10 percent of sales. There are 6.5 million shares of stock outstanding, the applicable tax rate is 35 percent, and investors require a return of 13 percent for a company of this risk. Given free cash flow (FCF) of the firm is defined by the sum of the components on the left-hand side of the cash flow identity (discussed in Chapter 2), answer the following:
A. Compute Gershwin's FCF for years 1 - 3.
B. Compute the present value of the FCF for years 1 - 3.
C. Considering the growth rate in sales after year 3, compute the present value (i.e. t=0) of all FCF for Gershwin.
D. If you divide the value obtained in part c by the number of shares of stock outstanding, what would this represent?